Tax inspectors predict VAT 'fraud explosion'

FRAUDULENT exploitation of new European VAT rules is expected to result in annual revenue losses of more than pounds 600m from 1 January next year.

Tax inspectors warned yesterday of an 'overnight fraud explosion' when VAT declarations are left to the honesty of individual traders instead of being registered at formal border controls.

A similar forecast of potential fraud has been outlined in official reports by HM Customs and Excise which fears a sharp rise in dishonest claims with the creation of the single European market.

Dave Morris, national group secretary of the National Union of Civil and Public Servants, said the failure to harmonise European Community VAT levels presented a great opportunity for fraud once there were no physical checks at the frontier.

From 1 January, VAT is due to be paid only after final sale, rather than when the goods are released from the docks. Importers will merely have to declare the items sold in their regular monthly or quarterly return.

Dishonest traders would import the goods from another European country, resell in Britain at a price to include VAT and then pocket the 17.5 per cent due in tax. All exports between member states of the EC are zero-rated in the country of origin.

If importers do not declare the goods it will be up to Customs and Excise to match European records of all export transactions with items sold at a later date anywhere in the country.

Even for more honest traders, a temptation to 'under record' the level of imports may prove hard to resist.

Customs and Excise put forward plans for 400 VAT inspectors to be switched from frontier work to domestic inspection so that it could increase the level of surveillance of companies and individuals known to trade heavily within the Community. But reductions in public spending have meant the jobs saved by the removal of border controls are not to be replaced, leaving Customs and Excise 400 staff below target.

Mike King, Customs group secretary for the NUCPS, said it was madness to reduce the number of VAT inspectors at a time when the Government was trying to cut its borrowing requirement.

'VAT inspectors are highly cost effective, raising well over 10 times their cost in additional revenue. The European single market will create a land of opportunity for tax fraudsters. The 400 jobs must be restored,' Mr King said.

Unions within Customs and Excise believe that proposals for an extra 2,000 VAT staff could generate additional government revenue of pounds 1bn a year, with an immediate one-off recovery of VAT debts of pounds 600m.

Mr King said that legitimate businesses would benefit as they would cease to be undercut by companies able to lower their prices because of non-payment of taxes. A reduction of 300 inspectors this year meant that some 'low risk' traders would never be inspected.

He added: 'The public has paid this tax but we believe that Customs can no longer give an assurance that it will go to the Exchequer in full and at the right time.'

However, Customs and Excise maintained that it was better able to target inspections through more sophisticated risk assessment.